SINGAPORE, Jan 29 - Indonesian share prices plunged sharply on Thursday, hurt by investor fears that index provider MSCI could downgrade the country from emerging to frontier market status. The potential reclassification, coupled with a high-profile broker downgrade, prompted a rapid exodus of capital and sent the benchmark Jakarta Composite Index into a trading halt.
The Jakarta Composite Index slid about 8% in early trading on Thursday, triggering the exchange's circuit breakers after a 7.4% fall on Wednesday. The two-day move pushed the market toward what was described as its largest two-day drop on record.
Official response and timing
The Indonesia Financial Services Authority and the Indonesia Stock Exchange said they would hold a joint media briefing at 0600 GMT on Thursday to address recent market developments, according to an invitation issued by the exchange.
Index risk and potential selling pressure
MSCI, a major provider of market indexes followed by large passive investment funds, flagged problems with market transparency and said a downgrade from emerging to frontier market status was possible. MSCI also said it had frozen updates to Indonesian entries in its products while it engages with authorities to resolve what it termed "investability risks" related to a lack of clarity on stock ownership, trading and price formation.
Because billions of dollars track MSCI benchmarks, a downgrade would likely force passive funds to sell Indonesian assets. Active managers, who are benchmarked against those indexes, would also face pressure to reduce exposure.
Goldman Sachs reaction and estimated outflows
U.S. investment bank Goldman Sachs lowered its recommendation on Indonesian equities to "underweight" the day after MSCI issued its warning. The bank's strategists estimated that, should MSCI move forward with a downgrade, outflows could range between $2.2 billion and $7.8 billion, although they judged an actual downgrade to be unlikely.
Goldman's team also said they expected the market to remain under pressure and did not view the sharp declines as an attractive entry point. They pointed to several domestic macro challenges including weak private consumption, slowing credit growth, and a fiscal deficit that has been rising toward the legal cap of 3% of GDP.
Policy concerns and currency impact
Foreign investors' flight has been driven in part by unease over policy decisions under President Prabowo Subianto. The president's broader fiscal looseness and increased state involvement in financial markets have been cited as factors in the outflows. Market confidence was further shaken by the appointment of Prabowo's nephew, Thomas Djiwandono, to the central bank earlier this month, and by last year's abrupt dismissal of Finance Minister Sri Mulyani Indrawati.
Those developments have also weighed on the rupiah, which has been pushed to record lows amid the selloff.
Market commentary and investor behavior
Rahul Ghosh, a portfolio specialist at T. Rowe Price in Singapore, warned that MSCI's caution and any subsequent action could make capital raising more difficult or more costly for Indonesia. He noted this dynamic could produce a negative feedback loop, with some market participants choosing to de-risk in advance of formal changes.
Recent capital flow data
Data compiled by LSEG showed overseas investors sold 13.96 trillion rupiah, equivalent to $834 million, of Indonesian shares in 2025. That marked the largest annual outflow since 2020, with the selling trend continuing into January.
Outlook
With MSCI engaging with Indonesian authorities and Goldman Sachs cautioning investors, market participants face heightened uncertainty. The potential forced selling by passive funds, the pressure on active managers to reduce exposures, and ongoing domestic policy concerns together create an environment in which analysts and investors expect continued market stress in the near term.